Q. Is there any long-term damage done by this kind of situation to small business?
There’s very few people who would bet against the U.S. in the long term.
Q. No matter how the cliff is resolved, it’s expected that eventually, there will be billions of dollars in cuts to the federal budget? What will be the impact on small business?
It’s probably finally dawning on lots of people, especially on the political right, what a large portion of the economy government spending is. In say, the 1960s, (a percentage of) government spending was what’s called productive spending – the highway system, universities, infrastructure and entitlements. What could be classified as consumptive spending – entitlements (like Social Security) then were a small share. Now it’s radically different. Entitlements are a gigantic chunk and productive spending is really decreasing as a percentage. Nonetheless, that decreasing share of productive spending and even that consumptive spending on entitlements, that’s still a massive chunk of the U.S. economy. And there are tons of U.S. businesses dependent on the government.
Inc. magazine every year does a list of the fastest growing companies. Government services dominated the list in the last decade. Washington D.C. is the top metro area for Inc. 500 companies since 2000. If a substantial of that is cut, you’ll have a massive effect not just on small businesses, but innovative, fast-growing companies. History certainly shows that government spending has certainly played a very important role in innovation and economic growth. National Institutes of Health-funded research at universities is hugely important. Small Business Innovation Research grants at federal agencies are hugely important.
Q. What kind of chance does a young company have to sell a product or service to the government in this climate?
There are still government programs that mandate that a certain percentage of government contracts have to be given to small business. Those percentages are probably not going to go away. But it does mean the dollar amount probably declines. It’s not just a federal issue. State government budgets have been seriously affected the last few years. They’re getting healthier but they’re certainly not back to where they could be or should be.
Q. Is this a good time or a bad time for someone to start a company?
My own personal view is that it’s never a bad time to start a company. There are good cases to be made that starting in an economic expansion is great because consumer demand is high and people will spend money. There’s arguments to be made that starting in a downturn, whether it’s a recession or a bear market or a sluggish recovery is also a good time. If you’re a tech startup for example, the demand for technology has been pretty constant the past few years. There’s also schools of thought that say if you start up in a recession, it’s sort of a trial by fire. If you start up in hard times, and you survive, there’s less competition and you come out of it stronger.
A few years ago, we did a count of Fortune 500 companies, and over half of them were founded either in recessions or bear markets.
Q. Given what has happened in the economy the last five years, is it going to be harder to be a small business owner and expand your company in the next five to 10 years?
Yes, in some sectors. Take retail. There’s the Wal-Mart effect – you’ve seen huge consolidation in retail. You’ve seen a huge consolidation in the information technology sector. We’ve sort of entered a “you eat or be eaten” atmosphere. Investment banks and especially the (stock) markets in the retail and information technology sectors simply aren’t welcoming anymore toward small innovative companies. You either have to get big fast by being an acquirer or you have to be acquired.
Look at the employment distribution over the last 20 years. The percent of employment in giant companies – those with 10,000 or more employees – has risen and it’s correspondingly falling in small businesses. That’s obviously points toward something.